(Bloomberg) -- Barclays Bank Plc and Danske Bank A/S strategists say the pace of interest-rate cuts by the European Central Bank may prove slower than the market is pricing.
Strategists from the banks say quarterly cuts are likely, rather than reductions at every meeting from December through June. Danske points to sticky inflation, while Barclays suggests the ECB may opt for a lower terminal rate, achieved via a more steady period of easing.
Money markets globally have been swift to raise bets on faster and deeper central bank easing as they gear up for the Federal Reserve to kick off its rate-cut cycle with a possible half-point reduction on Wednesday. For now, the ECB is moving at a faster clip than the Fed after delivering its second rate reduction at a meeting last week.
“The market may once again consider more seriously the possibility that the ECB only delivers quarterly cuts next year,” wrote Rohan Khanna, head of euro rates strategy at Barclays.
In Europe, Barclays and Danske recommend buying a strategy known as a butterfly that uses derivatives tied to the three-month Euribor rate. The trade will do well if there’s a slower pace of ECB cuts in the first half of next year, shifting to a quicker tempo in the second.
According to Khanna, the Fed could damp rate-cut expectations globally if it pushes back on the extent for reductions. In addition, growing pessimism around the euro region’s growth prospects may favor a lower terminal rate rather than a faster pace of cuts, he said.
Khanna’s expectations contrast with the pace envisaged by Barclays’ economists, who predict consecutive quarter-point reductions in December, January and March.
Danske’s chief strategist Piet Christiansen cites elevated domestic inflation pressures due to high wage growth as a reason for policymakers to cut only once per quarter. The Danish bank sees quarterly 25-basis-point reductions through September next year.
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